Are telcos building for the wrong kind of customer?

The explosive growth in data continues unabated and has seen telecoms operators rushing to pour capex into the latest generation of high-speed bandwith. However, many telcos will be frustrated that such significant ongoing investment is not reaping the rewards of a corresponding increase in returns.

Perhaps the illness of the industry is that consumers have come to expect so much more bandwith for the same price. This is a broken business model, and that breaking point is nearing.

Product and pricing teams often have limited clarity surrounding the true profitability of the products they sell. Network costs were once valid to be considered as ‘sunk’ costs, as new customers were brought on to fill swathes of available capacity. However, the levels of traffic today are so significant that additional network capacity is regularly required and therefore these costs must form a key part of profitability analysis. Looking only at gross profit will paint a rosier picture, but it ignores the elephant in the room.

Telcos may also be unclear around what percentage of their customer base is using the maximum amount of data that their network allows. Further, they may not realise the strain these customers (who often form a single-digit percentage of a total customer base) are putting on the network and how this affects the bottom line and drives the need for persistent additional investment.

It’s good to talk… between business functions

Addressing this challenge requires a forensic understanding of the link between customer demand and profitability, and more effective use of the value creation levers at telcos’ disposal.

Telcos must establish a much closer working relationship between product and pricing teams and the engineering/network functions. The former must stop looking at competitor activity to inform and shape their own planning approach, rather seeking the answers internally that will work for the business. Simply “keeping up with the Joneses” is a strategy set up to fail.

Have the confidence to cull customers

With proper interlock, telcos will be able to answer the critical question of whether it would be better to forego a portion of their market share to increase profitability. For example, by removing products offering unlimited data packages or charging significantly more for them. Or, indeed, reassessing the fundamental business case for 5G in B2C, which is unlikely to drive any revenue uplift at current price points. Operators can see tangible growth brought to life through use cases that vendors are marketing – smart factories, smart offices, Industry 4.0, and remote healthcare diagnoses through 5G, for example – but there is no equivalent case for consumers.

By addressing unprofitable consumer groups, telcos will be able to plan and build networks much more closely aligned to demand, making better use of network capacity and reducing liquidity pressure given a more tempered approach to near-term capex.

Don’t let unprofitable demand drive capex

Telcos must realise there is little point building a gold-plated network if it cannot be expected to deliver a medium-term return on investment. Some operators today are upgrading networks to support ‘bandwidth-hungry’ use cases on next generation mobile devices, in anticipation that these use cases/devices will dominate the market in the coming years. However, if a gold-plated network is to be built, there must be a bulletproof plan to monetise it, aligning accurate forecasts for mass consumer adoption of these use cases/more powerful devices with appropriate timing for the levels of investment required in builds.

It’s time for telcos to get real

The industry as a whole has to accept that prices need to rise, and operators shouldn’t be afraid to turn some customers off by doing this. Having the confidence to shed dilutive, loss-making customers may increase churn, but it will stop the associated building out of networks to serve the wrong kind of customers.

The industry is approaching breaking point as data packages continue to swell and customer demand for even more shows no sign of abating. Taking a step back now to gain a more holistic understanding of your own engineering, operations and financials will build a clearer picture of what is truly driving profitability. This way the vicious cycle can be broken and future decisions on network builds and technology rollouts can be taken with much greater confidence in meeting true demand and delivering a return on investment.